Promising future flow foreseen for Sasol
Sasol has slowed its spending on the Lake Charles Chemicals Project in Louisiana, US, as it is focusing on productivity and efficiencies in the ramp-up to first production later this year.
But there is no change to the overall cost, timelines or scope of the project.
After the unwelcome news to Sasol shareholders last year that the project was going to overrun its original cost projections by about US$4bn to come in at about $11.13bn, it has been progressing smoothly, despite last year’s devastating Hurricane Harvey in the region.
Lake Charles was 81% complete at the end of December, with $8.8bn having been spent. The project will also gain from US tax reforms designed to promote investment in the US. Sasol CFO Paul Victor says about 24 pieces of tax legislation apply, which makes it very complex. But Sasol estimates it will gain about $500m or an additional 0.5% in the internal rate of return (IRR) over the life of the project as a result of the tax amendments.
Joint president and CEO Stephen Cornell says Sasol will be reviewing the IRR on Lake Charles in the next few months. Based on current ethane prices and the tax reforms it will deliver an IRR of 9%-9.5%.
Investec Asset Management fund manager Hanré Rossouw says that after its initial cost overruns, the fact that Lake Charles is maintaining cost guidance gives the market confidence that it will meet targets.
Cornell says Lake Charles will treble Sasol’s chemicals production in the US and will add about $1.3bn to group earnings before interest, tax, depreciation and amortisation by the 2022 financial year.
In the six months to December Sasol earned 72% of core operating profit from SA, 14% from Europe, 3% from North America and 14% from the rest of the world. When Lake Charles comes on stream, it will significantly boost the contribution from the US.
Lake Charles is the largest of the two offshore investments Sasol aims to complete by 2022. The second is the production-sharing agreement area in Mozambique, where it has drilled nine holes for oil and gas in the first phase of development.
Cornell says while the gas results from the wells are in line with expectations, the oil is about half of the range that was expected. This is disappointing, but it means less development will be required, so the returns on capital invested will be the same.
The group’s interim results were described as generally satisfactory. Victor says the dollar price of Sasol’s basket of base chemicals rose 10% in the first half and that of performance chemicals 7%, as demand was stronger for most products. But rand strength affected profits in the energy, base and performance chemicals businesses.
Rossouw says rand strength has been a recurring theme in the resources sector.
"As we have seen with Anglo American, Sibanye-Stillwater and Harmony Gold Mining, rand strength is weighing on SA producers of dollar-based commodities such as oil and gold. Sasol’s local sales were also squeezed by the weak SA economy. This is where Sasol’s diversification into the US is paying off handsomely."
Volumes from Natref, the refinery at Sasolburg, fell 21% year-on-year because of a planned shutdown and an Eskom power outage, while the weak SA economy crimped demand for liquid fuel.
Though Sasol does not want to acquire more refining capacity, it will continue to invest in Natref, Cornell says. It is one of the most complex refineries in SA, with good conversion capability. Sasol is still busy with feasibility studies on upgrading Natref to make European emissions standard five fuels and it is developing a procurement and optimisation study to improve plant availability.
While earnings a share dropped 21% to R14.21, core headline earnings, which strip out one-off items, increased 5% to R18.22. The interim dividend rose 4% to R5.
In future, dividends will be based on a proportion of core headline earnings rather than the more volatile earnings a share. Sasol intends a 40% payout ratio by 2022, when major capital investments are complete.
Victor says R27.7bn was spent on capital projects in the first half of the year, mostly on Lake Charles. Spending for the full year will be R54bn, falling to R38bn next year. The disposal of Sasol’s Canadian shale gas asset is gaining momentum and the group could realise about $1bn from asset disposals and optimisation as it completes its portfolio review.